GCC banks affected by high provisions

Dubai: Earnings growth for the GCC banking sector in the second quarter of 2010 was considerably affected by the continuation of high provisions, says Global Investment House.

"While the top-line [of banks it covers] barely moved year-on-year, provisions grew by 5 per cent year-on-year. Provisions, mostly emanating from loan defaults, shifted gears during the quarter under review, after taking a breather in first quarter of 2010, leading to a massive 48 per cent quarter-on-quarter rise in second quarter of 2010," Global says.

It notes UAE stood out from its neighbours in the region given the fact that almost half the provisions taken in second quarter of 2010 came from its banks followed by Saudi Arabia, which contributed 23 per cent to the provisions taken.

The aggregate net interest income of GCC banks grew by a meagre 1 per cent year-on-year, showing stagnancy in the top-line, Global said.

The loss of momentum came about as sheer stagnancy in loans haunts the GCC banking sector. Loans growth remained diminished, growing 3.5 per cent year on year in 2010 and 0.7 per cent year to date while the aggregate net interest margin of GCC banks tapered-off by 12 basis points over 2009.

Spectrum

Different movements in net interest income were seen across countries with Saudi Arabia and Qatar at the opposite ends of the spectrum with a 9 per cent year-on-year decline and a 26 per cent year-on-year jump, respectively.

Qatar's net interest income rode well due to a 46 per cent year-on-year jump in Qatar National Bank's top-line. Shrinkage was observed in the Net interest income of Kuwaiti banks while that of UAE exhibited a healthy growth.

Provisions, mostly emanating from loan defaults shifted gears during the quarter under review, after taking a breather in first quarter of 2010, leading to a massive 48 per cent quarter-on-quarter rise in second quarter of 2010.

The UAE stood out from its neighbours in the region given the fact that almost half the provisions taken in second quarter of 2010 came from its banks followed by Saudi Arabia, which contributed 23 per cent to the provisions taken.

Gauging a pick up in macro-economic activity across the GCC and certain country specific risks, Global maintains its positive stance on Qatar and is neutral on the banking sectors of the remaining GCC countries.

That said, GCC banking sector is expected to show an increase in the provisions in the coming quarters, related mostly to those trickling in from UAE. Banks in the UAE are anticipated to tighten their belts in the wake of expected guidelines from the Central Bank related to provisioning for exposure to Dubai World and related entities.

Changes

While ADCB has already taken the hit in second quarter of 2010, other banks are still awaiting the impact to be felt.

Moreover, additional provisions are expected due to changes in the central bank's regulations. While profitability of UAE banks in second half of 2010 is expected to be lower than in the first half, some other countries may fare better, with easing of provisioning requirements.

— With inputs from Zawya Dow Jones